The large New York banking company Citigroup is currently in trial defending a claim related to the sale of EMI – the recording label of such groups as the Beatles, Frank Sinatra, the Sex Pistols, and stars of today like Katy Perry and Kanye West. According to the British equity fund Terra Firma, in 2007 when it was negotiating to purchase EMI, Citigroup’s lead financial advisor on the transaction told them they needed to raise their bid because a competing equity firm had made an offer of for the company. In response to this information, Terra Firma raised its bid a substantial amount to $6.6 billion (yup, billion). That bid was accepted and financed through Citigroup. The fly in the ointment – according to Terra Firma – there was no other offer for the company. Not surprisingly, Terra Firma is suing Citigroup under a fraud theory in New York state court. And since EMI has lost billions in value since the deal, they are seeking billions from Citigroup. For more details about the claim, here’s a copy of the complaint.
Generally speaking, there are 4 elements for a fraud claim – (1) a knowing misrepresentation (2) of a material fact (3) reasonable reliance on the misrepresentation (4) resulting in damages. The legal question here becomes, does a phantom offer equate to a material fact? Looking to a material fact, it is best defined as follows:
A fact is material to a negotiation if it reasonably may be viewed as important to a fair understanding of what is being given up and, in return, gained by the [negotiation]. – Auscherman v. Bank of America Corp, 212 F.Supp.2d 435 (Md 2002)
Is a competing offer material to a negotiation? Competing offers help negotiators determine the market value for the item in question, which causes bidders to ask themselves “should I make an offer or should I pass on this opportunity?” So the answer is an easy yes. Terra Firma claims that it would not have bid this high if had known there was no other bidder. Thus, if the allegations in the complaint are true (a big if), Citigroup is in a world of hurt. And if any lawyers were a part of the transaction and knew of the phantom offer, they have violated Rule 4.1. However, it’s not clear if any lawyers were part of this portion of the transaction.
An important note about phantom offers – some commentators call them hard-ball or competitive negotiation tactics. This kind of language makes it sound distasteful but ok to use them, which is not the case. I call them what they are: fraudulent negotiation tactics.
The trial in this case started on Monday, and it will be interesting to see how the evidence shakes out. If Citigroup did indeed do this, it will be big headlines. Here’s a press report on the trial, and an excerpt of the opening argument statement by Terra Firma’s lawyer, super lawyer David Boies.
Attorney David Boies said that “They knew that they’d lied and made Terra Firma make this bid on the fictional claim that there were multiple bids.” The lawyer said that Citi took advantage of its close relationship with Terra Firma to keep EMI as a client when the company was threatening to let another financial institution handle the deal. . . . Boies told jurors in his case to review e-mails and documents related to the case and put several of them on display for the jury. He said that the documents would show that Citigroup had deceived Terra Firma by hiding the fact that it knew that the only other bidder, firm Cerberus Capital Management, had dropped out of the case.
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